Student loan stress: rate hikes could delay paying off that debt

Student loans will take longer to pay off as the Bank of Canada continues to hike its benchmark interest rate, according to the head of Credit Counselling Canada.

The Bank of Canada increased its key lending rate a quarter point in October — the fifth hike since last summer. The central bank’s overnight rate sets the base at which banks and creditors lend money, pushing up borrowing costs for Canadians. The rate hit 1.75 per cent, its highest point in nearly a decade.

“Undoubtedly it’s going to increase the debt burden of students and how long it takes for students to dig themselves out,” said Michelle Pommells, chief executive officer of Credit Counselling Canada.

With the Canada Student Loans Program estimating that the average university student graduates with $16,727 in debt, graduates could notice a significant difference in their monthly payments.

“Today’s students are paying 40 per cent more in university tuition than they did 10 years ago. This means a lot of people are graduating with significant student debt. When combined with living expenses, that can really strain their finances,” said Pommells. “It can take 10 years or more to pay off that debt. That could delay life milestones like getting married, owning a home or even having children.”

To stimulate the economy after the recession in 2008, the central bank has kept the interest rate at historic lows. Ideally, the Bank of Canada aims to keep rates at “neutral,” the level of interest that neither starts or stops economic activity. A strong economy would see the overnight rate hover at around three per cent — nearly double the current level.

After nearly 10 years of rarely low interest rates, students may be accustomed to relatively cheap debt, Pommells said.

“We’ve lived in a very low interest rate environment for more than a decade now. For a lot of people, carrying debt has become a way of life,” Pommells said. “It’s been so inexpensive. Students have gotten used to very low costs of interest and will have to reconsider how they spend and borrow and really make some tough choices.”

Most student loans, whether from a bank or the Ontario Student Assistance Program (OSAP), are set to a floating interest rate, which fluctuates as the Bank of Canada and financial institutions change their cost of borrowing. As the central bank raises its rate, banks and lenders hike their base interest rates as well, known as prime.

With multiple increases over the past year and more expected in the near future, loan payments will increasingly become more expensive than students expected.

“When you graduate and your student loans start to accrue interest, it’ll be at a higher rate — more likely than not — than what you would see (if you graduated) today,” said Jack Duff, president of the Ryerson Investment Group. “That means that your monthly payments will be higher than they would be today.”

Students and graduates will feel the effects in more places than just their student loans, Duff said. The central bank’s lending rate changes hit other products that students and graduates deal with daily.

“Let’s say you have a mortgage on a condo and that starts to creep up. You have a car loan and that starts to creep up. All of a sudden, you can’t pay your credit card in full every month. Then all those costs start to kick in,” Duff said. “I think the thing to worry about the most is keeping everything level so that the really high interest rate things don’t fall behind.”